CNX Resources Corporation

Good morning. Welcome to CNX Resources' third quarter 2020 earnings conference call. Our participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there'll be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Tyler Lewis, VP of Investor Relations. Go ahead.

Thank you, and good morning to everybody. Welcome to CNX's third quarter conference call. We have in the room today Nick Deulius, our President and CEO, Don Rush, our Chief Financial Officer, and Chad Griffith, our Chief Operating Officer. Today we will be discussing our third quarter results. In a continued effort to simplify our message to reach a broader investor base, we have modified our earnings press release this quarter and provided an updated investor slide presentation, which is posted to our website. This slide presentation is focused on what we believe are the metrics that matter most to our investors. Also detailed third quarter earnings release data, such as quarterly E&P data, financial statements, and non-GAAP reconciliations are posted to our website in a document titled 3Q-2020 Earnings Results and Supplemental Information of CNX Corporation. One other change this quarter is that in conjunction with the recently closed merger of CNXM, the company has changed its reportable segments to shale, coal bed methane, and other. The other segment includes nominal shallow oil and gas production, which is not significant to the company. It also includes various other items managed outside the reportable segments. More information will be available in our 10Q, which we plan to file today. As a reminder, any forward-looking statements we make or comments about future expectations are subject to business risks, which we have laid out for you in our materials today, as well as in our previous Securities and Exchange Commission filings. We will begin our call today with prepared remarks by Nick, followed by Don, And then we will open the call for Q&A where Chad will participate as well. With that, let me turn the call over to you, Nick.

Thanks, Tyler. Good morning, everybody. I want to start with two simple themes, and I think these themes sum up how we view CNX's future and the investment opportunity that it presents. The first one is we do the right thing, and we define doing the right thing as making capital allocation decisions to optimize the long-term intrinsic value per share of CNX for our owners. Second theme, it's just math. Our decision-making and investment thesis comes down to simple arithmetic. I want to go over to slide two in the deck that we made available this morning. And I think slide two highlights the four crucial metrics that sets us apart from peers. I'm going to start at the top left of that slide with inventory. The inventory chart that you see there highlights how CNX has the deepest and the longest-lived inventory under a $2.50 gas price. that's an inventory more than double the peer average. And when you look at our total inventory, we're sitting at 49 years, which is more than three and a half times the peer average. This independent analysis from Embarrass is a ground-up technical assessment from a very well-respected third party, and the study confirms exactly what we've been saying for some time and should put the rest to any concerns when it comes to CNX having best-in-class and the deepest inventory of future locations that works at a $2.50 gas price or lower. More importantly, the steep inventory, that's the feedstock for the free cash flow generating factory that extends way beyond our seven-year outlook. You also see on the slide there are other metrics that we think are crucial, three in particular. As we discussed before, CNX has the lowest cash operating costs in the basin. Our all-in cash costs, which are approaching a buck in the fourth quarter and for 2021, are going to drop even lower and start to approach $0.90 in 2022. That's soon going to make us the lowest all-in cash cost player in the basin, which is an awesome thing. We also offer the highest free cash flow yield when compared to our peers. We talked about that in the recent past. And last, we've got one of the best balance sheets. The balance sheet's only getting stronger as time goes on and as debt level is reduced. So in all, we think these four metrics, they clearly set us apart. They illustrate the significant potential upside. We are a free cash flow per share factory that offers de-risk returns for our owners. If you go to the next slide, slide three, you see a graph there also from the Invera study and report that I referenced on the last slide. And this one goes into more detail on what that economic inventory for each peer at different gas prices looks like. And as you can see, we've got the best inventory at low gas price levels. We've got the best inventory at the strip pricing. And we've got the best inventory at high gas price levels. We've got over a decade of inventory at a $2 NYMEX price deck. over 20 years at today's $2.45 strip, and 50 years at $3 gas. Now, our industry, it is always full of chatter about the metric or strategy of choice for the quarter of the year, sort of what's the color or the flavor du jour. But in the end and over the long haul, there's really three things to truly get excited about in our industry. That's inventory that works at a $2.50 or lower gas price. That's being a low-cost manufacturer of natural gas. and that's posting consistent and significant levels of free cash flow per share. We hit the mark on every single one of those. As mentioned, we've got multiple decades' worth of core inventory that's economically advantageous at that $2.50 pricing level or $2.25. We've got an asset base that's delineated, and we've built an industry-leading low-cost structure coupled with a multi-year hedge book. All those things generate substantial free cash flow per share through all phases of the commodity cycle. Our low-cost structure... It's made possible by several competitive advantages that creates a moat and which our peers can't easily replicate. One of the most important and non-replicable of those is that we own our midstream assets. When you're a commodity manufacturer, being the low-cost, most reliable manufacturer of that commodity, core and crucial. We're fast approaching all-in, fully burdened cash costs of $1 when the peer average is somewhere around $1.70. We expect to generate consistent quarter-on-quarter, year-on-year free cash flow for the next seven years, somewhere to the tune of $3.4-plus billion on a cumulative basis. That's genuine, substantial free cash flow that's nearly one and a half times our current market cap. Our business model should quickly drive our debt leverage ratio lower, and our competitive advantages, they should lead to our free cash flow per share outperforming peers and staying strong for years to come. This has been many years in the making to create this simple but compelling story. and it's a straightforward one. Again, this is just math and doing the right thing under proven capital allocation methodology. Our free cash flow yield is not only industry-leading, but more importantly, market index-leading across a wide spectrum of different industries and sectors. Thus, we're shifting our messaging and our focus to appeal to a broader investor group beyond the traditional E&P investors. Now, let's talk a little bit about the state of the world. There's a topic you could spend an inordinate amount of time on today and how it impacts our thinking. Clearly, right, we all know this. The world is faced with challenges and uncertainty, and we think there's a significant risk that those are going to escalate over the next 90 days. So if you reflect on what's happened so far in 2020, this year, of course, has proven to be completely unpredictable. We've had COVID. We've had oil prices collapsing. economic volatility, all kinds of calamities. And what gas prices are going to do next year, that's partly a function of all those things we've already dealt with this year. But we recognize this unpredictability, and we've built our company not just to withstand volatility, but to thrive under it and the potential challenges that come with it. We think the next 90 days present elevated risks, given the recent rise in COVID cases, the election that's looming, uncertainty on how winter weather shapes up or whether it does strongly or weakly. and the economy, as well as how, frankly, the producers of oil and natural gas are going to respond to all that. However, despite this unstable world, we've got a stable platform to continue to execute our plan and adjust to the new realities. We expect to produce a significant amount of free cash flow regardless of what happens in the next 90 days. And given all the uncertainty that exists currently, we plan to use that free cash flow over the next 90 to further reduce debt. It's the prudent thing to do in the near term given the uncertainty that we face. And as we enter into 2021 and beyond, our main priority is still going to be to delever. And in rough math, we expect to pay down approximately $1 billion of debt through 2023. You assume the adjusted EBITDA stays around $1 billion a year. That gets us to about a 1.5 times debt leverage ratio. Now, if you look at those next three years that I just talked about, I think those next three years are a great illustration of how our de-risk cash flow per share factory is is poised to allocate capital into very intrinsic value per share accretive ways. The great thing about generating approximately half a billion dollars in free cash flow per year is that it gives you some flexibility without sacrificing the debt reduction goal that I laid out. And if our free cash flow yield stays around 20%, we're going to have the wherewithal to return capital along the way through share buybacks while still achieving our debt leverage target of one and a half times. We kept around $1 billion of prepayable debt on our revolvers that are due in 2024, and we expect to generate approximately $1.5 billion in free cash flow before they expire. So you can see that we got the ability for opportunistic capital returns via share buybacks along the way if we so choose. And if we continue to hover around a share price that reflects a 20% free cash flow yield, I suspect we'll use some of that $1.5 billion in free cash flow over the next three years and between now and a 1.5 times leverage ratio to do just that. So in the near term of 2021, budgeting a portion of our free cash flow towards share repurchases, if our stock continues to yield 20% on a cash basis, that gets us off to a really good start. Where we actually land is going to depend on all the facts and circumstances and comes down to, there's that term again, the math. But you can see the optionality and the value creation potential that are presented by doing the right thing under sound capital allocation and following the math. I'd like to talk a minute about M&A. We always remain open-minded to considering M&A that makes sense for our owners. For CNX to acquire something, it's going to have to have a risk-adjusted rate of return that beats our other capital allocation options. With our stock at a 20% cash yield, acquisitions are going to have a really tough time competing. Larger M&A, as emerging with basin peers and the like, you're going to need to find someone who's not going to dilute or weaken our best-in-class attributes that harken back to slide two that I covered a couple of minutes ago. So M&A that dilutes our best-in-basin inventory, that wouldn't be attractive. As we've established, we don't need inventory. And since we lead the basin on inventory that works at $2.50, gas prices are lower, both in terms of locations and years at maintenance activity levels. There's really a compelling case there that the inventory we've got is fully within the grasp of what we own and control. M&A that increases cash costs, that wouldn't be attractive. As I said, we've got the lowest cost in the basin. Those costs are guiding even lower. So any merger that would increase our go-forward costs would be difficult to rationalize when we're in a commodity manufacturing business. M&A dilutes our free cash flow per share. That can be a problem. Avoiding dilution of free cash flow per share and having a clear path to long-term growth in free cash flow per share, those are essential for the creation of long-term shareholder value. An M&A that would harm balance sheet through high debt and or off-balance sheet commitments like unused FTE that's probably the wrong direction. Balance sheet strength and the ability to de-lever organically and avoiding burdensome long-term gathering, processing, and transportation contracts, those GP&T contracts, those are critical factors to future success in our industry. So to sum up these points, again, always open to considering moves that improve shareholder value. But we're not interested in value-eroding M&A that takes our industry-leading metrics and balance sheet and degrades them to improve someone else's metrics and balance sheet at the expense of our shareholders and employees. Pretty simple approach. So in summary, consistent with our long-term multi-year plan, we intend to invest our free cash flow in the right places to optimize the long-term intrinsic value per share of the company. We expect our sustained and competitive advantages to create enhanced value for our shareholders. We remain committed to our strategy, and we've never been more excited about the opportunity we've got in front of us. I'm going to end where I started. We do the right thing under sound capital allocation theory, and it's just math. With that, now I'm going to turn things over to Don Rush.